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Mongolia
Energ
y C
orp
ora
tion L
imite
d A
nnual R
eport 2
012
Mongolia Energy Corporation Limited
40th and 41st Floors, New World Tower 1, 16-18 Queen’s Road Central, Hong Kong Tel : (852) 2138 8000Fax : (852) 2138 8111Website: www.mongolia-energy.com
Annual Report 2012Incorporated in Bermuda with limited liabilityStock Code: 276
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34,000 hectares of coal concession
32,000 hectares of coal, ferrous and non-ferrousmetals concession
261,593 hectares of coal, ferrous and non-ferrousmetals concession
2,986 hectares of ferrous metals concession
CHINA
MONGOLIA
Xinjiang
Local road, Bodonch road
Local road, Uyench canyon
Khushuut Road(Built by MEC)
Bayan-Ulgii
Zavhan
Govi-Altai
Uvs
Khovd
YarantBorder Station
Baiteg Border Station
Caution Regarding Forward-Looking Statements
This Annual Report contains certain forward-looking statements and opinions with respect to the operations and businesses of MEC. These
forward-looking statements and opinions relate to, among other things, our objectives, goals, strategies, intentions, plans, beliefs, expectations
and estimates and are generally indicated by the use of forward-looking terminology such as believe, expect, anticipate, estimate, plan, project,
target, may, will or other results of actions that may or are expected to occur in the future. You should not place undue reliance on these
forward-looking statements and opinions, which apply only as of the date of this Annual Report. These forward-looking statements are based on
MEC’s own information and on information from other sources which MEC believes to be reliable. Our actual results may be materially less
favorable than those expressed or implied by these forward-looking statements and opinions which could affect the market price of our shares.
You should also read the risk factors set out under our circulars and announcements for each of the transactions, which are deemed
incorporated and form part of this document and as qualification to the statements relating to the relevant subject matters. Neither MEC nor its
directors and employees assume any liability in the event that any forward-looking statements or opinions does not materialize or turns out to
be incorrect. Subject to the requirements of the Hong Kong Listing Rules, MEC does not undertake to update any forward-looking statements or
opinions contained in this Annual Report.
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Border station
Lake
Local road, Uyench canyon
Local road, Bodonch road
Khushuut road (Built by MEC)
Country boundary
Province boundary
Contents
02 Chairman’s Statement
04 Management Discussion and Analysis
26 Corporate Social Responsibility
28 Corporate Governance Report
38 Directors and Senior Management
40 Directors’ Report
51 Independent Auditor’s Report
53 Financial Statements
119 Five Years Summary of Results, Assets
and Liabilities
120 Corporate Information
MEC’s Western Mongolia Concessions
Mongolia is an independent country located in east and
central Asia, bordering Russia to the north and China to
the south, east and west. In terms of volume and
variety of mineral resources, Mongolia ranks among the
richest countries, possessing prospected deposits of
ferrous, non-ferrous, rare, precious and light metals as
well as rare earth elements. There are also numerous
deposits of non-metallic minerals and fossil fuels. The
most important minerals in terms of economic value
are copper, molybdenum, fluorite, coal, gold and rare
elements. (Source: Government of Mongolia)
Since 2007, MEC has entered into various acquisitions
of concessions for resources. We have an aggregate
concession areas of approximately 330,000 hectares for
coal, ferrous and non-ferrous metal resources in
Western Mongolia at Khushuut, Darvi, Gants Mod, Olon
Bulag, Govi-Altai and Bayan-Ulgii.
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Chairman’s Statement
ANNUAL REPORT 20122
“There is no substitute for hard work.” — Thomas Edison
Dear Shareholders,
In this financial year, we completed building the Khushuut Road, secured its commission from the
Mongolian authority, and commenced commercial production shortly thereafter. These progress mark a
milestone to MEC after years of our efforts and hard works.
Although it is a new chapter for us, challenges continue to follow. The commercial production
commenced near the close of this financial year, therefore, a low level of sales activities was recorded.
This was expected by us at the initial stage of commercial operation. Our devoted staff are looking ways
to improve our start-up issues facing us, and we hope to gradually ramp up our production and improve
our sales price.
This year we recorded a massive impairment loss in respect of our mine assets, and this was based on
the impairment analysis performed by an independent qualified valuer. A variety of factors and
assumptions were taken into account by the valuer in arriving with the impairment. The major factor
contributed to the significant impairment loss was due to a change made to our mine’s infrastructure
plan caused by the delay in obtaining a water permit for construction of a coal processing plant. As an
interim measure, we have planned to build a coal washing plant in Xinjiang. In the immediate term, we
have engaged a coal trading company with a washing plant to provide coal processing services to us.
The impairment loss has no impact on cash flow in the financial year.
Mongolia has tightened up foreign investments in its strategic sectors by passing the Foreign
Investment Regulation Law in May 2012. Investment or participation in the minerals sector by foreign
investors of exceeding 1/3 or more of a Mongolian entity of the sector will require approval of the
Mongolian government. It has no impact on our existing operation but we anticipate this may take
longer lead time to get our new projects approved by the Mongolian government in the future. As part
of our expansion plan, we will expand our horizon and actively assess potential resources investment
opportunities in our nearby market, Xinjiang.
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MONGOLIA ENERGY CORPORATION LIMITED 3
The Mongolian economy continued to grow at a very rapid pace; expanding by 16.7 percent year-on-
year in the first quarter of this year and coal export was its largest export earner. Meanwhile, the Europe
problems continue to batter the global economy. Coking coal demand in China also displayed a
downward trend due to the gloomy global economy in the first half of this year. Having said this, China
was still the world’s largest steel producer and consumer and a net coking coal importer last year.
Against the backdrop of weak global economy, premium quality coking coal still has its market in China.
Although we do expect the coking coal prices will fluctuate at the current stage, Xinjiang is a unique
market as a result of the China’s Go-West Policy, expansion on the western part of China is on the way
with the continued growth of steel mills in Xinjiang. Our quality coking coal has the demand from the
steel mills in the Xinjiang market. We strongly believe the economy of China will continue to boost and
are confident that our strategic location near the Xinjiang market will reap the economic growth of
China. Having coming into commercial operation, we will work proactively to expand our customer base
in the coming period.
In government relationship and community affairs, we entered into two cooperation agreements with
the Darvi soum and Tsetseg soum of Mongolia. The purpose of such agreements is to enhance
cooperation between the local governments and provide successful implementation of our projects and
investments while in return, we are required to provide support to the local communities. We will
continue to contribute to the local communities around us and help them to build up a better living
environment. As a responsible corporation, we will continue to protect and preserve the natural
environment around us, contribute to all rehabilitation works and to provide a better place for our
sustainable growth.
Mr. James Schaeffer, our former chief executive officer, retired in June this year. He contributed a lot to
MEC since he joined us in 2007 and led our operation from inception up to commercial operation today.
We now have a team of technical experts and professionals under the leadership of our managing
director, Ms. Yvette Ong. We will continue to move forward to accomplish our mission.
I foresee the coming period will be a mix of opportunities and challenges. We have been through all the
hard times in the past and I need your continuous support on our road ahead.
Lo Lin Shing, Simon
Chairman
29 June 2012
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Management Discussion and Analysis
ANNUAL REPORT 20124
OVERVIEW
Our principal project is the Khushuut Coking Coal Project. The Khushuut Coal Mine is located
approximately 1,350 km west of Ulaanbaatar in the aimag (province) of Khovd in Western Mongolia.
The Khushuut Coal Mine is about 311 km from the Xinjiang Takeshenken border, connecting by the
Khushuut Road built by us.
During the financial year ended 31 March 2012 (the “Financial Year”), we achieved completion of the
Khushuut Road, secured the approval from the government authorities for the use of the road and
commenced commercial coal shipment thereafter.
BUSINESS REVIEW
Khushuut Coking Coal Project
Khushuut Coal Resources
During the Financial Year, we had not conducted resources update program to our Khushuut coal
deposit. Therefore, our JORC in-place resources remain the same, i.e. approximately 141,456,000
tonnes (44,503,000 tonnes measured and 96,953,000 tonnes indicated).
As disclosed in our previous reporting, we have several mining and exploration licences which might be
affected by the Mining Prohibition Law (the “MPL”). Our mining operation in the Khushuut Coal Mine
and exploration activities under our concessions were conducted as usual and had not been affected by
the MPL during the Financial Year.
We have instructed our Mongolian legal advisers to conduct enquiry with The Mineral Resources
Authority of Mongolia (the “MRAM”) regarding the validity of our licences. We were informed that all
our mining and exploration licences are valid and in effect and none of them is within the list of the MPL.
However, we were informed that some of our licences have been overlapping with the watershed and
forestry areas which may have the potential in future to be adopted by the Mongolian government
pursuant to the MPL.
According to our Mongolian legal advisers, an overlapping area may be removed and the affected
licence still be valid and not subject to revocation if after the co-ordinates change, the licence could still
fulfill the requirements under the Minerals Law of Mongolia (“Mineral Laws”).
Our Khushuut coal resources and operation mainly consist of six mining licences. Based on the location
currently put forth by the Water Authority and Forest Authority, we only have two mining licences with
slight overlapping areas with the water basin protected zones. If these overlapping areas are resumed
by the Mongolia government under the MPL, based on our review and opinion by our independent
technical adviser, will not have a material effect on our Khushuut resources and operation.
Please refer to the paragraph of Mining Prohibition Law for further details.
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MONGOLIA ENERGY CORPORATION LIMITED 5
Khushuut Road
The Khushuut Road is approximately 311 km from our Khushuut Coal Mine stretching westward to the
Yarant border (Mongolia side) and Takeshenken border (Xinjiang side). It is a two-lane asphalted road of
7 meters width and side shoulder of 1.5 meters each. It has 17 bridges constructed along the road and
the loading capacity of the road is 85 tonnes per truck. The Khushuut Road is our main route for
exporting coal products to the People’s Republic of China (the “PRC”). We contracted the road
foundation work in 2008 and road surface pavement work in April 2010.
The approval for the use of the Khushuut Road was granted by the Mongolian government in December
2011. We formally commenced transporting coal products from our mine site via the Khushuut Road to
Xinjiang shortly after the approval.
Our operating subsidiary, MoEnCo LLC (“MoEnCo”), entered
contracts with local road construction and maintenance
companies for the winter period, through to March 2012. These
contracts were for winter road clearance and maintenance. We
are now in process of negotiation for revised contracts for
summer maintenance and road upgrades.
Mine Production
The Khushuut Road was commissioned in December 2011.
Before that the coal production on-site was kept at a minimum
quantity level as large production before the road approval
would cause the mined run-of-mine (ROM) coal to oxidize and
not suitable for export to our customers.
Mine Infrastructure and Equipment
The customs bonded yard and weighbridge area at the mine site
were completed during the Financial Year.
The customs bonded yard is now an official customs clearance zone with permanent customs and State
Professional Inspection Agency (SPIA) officers signed off by the Mongolian government. The customs
officials will be present at our mine site to seal trucks loaded with our coal products to facilitate the
shipping process.
We will commence our laboratory upgrade shortly for our coal samples analysis to be taken on-site
before shipping, and this will enhance the stability of our coal quality to our customers. The laboratory
upgrade will additionally facilitate the analysis of increased quantities of samples which in turn allows
for the projected phased increase in production and coal sales.
The Khushuut Road commissioned in December 2011
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ANNUAL REPORT 20126
Management Discussion and Analysis
Coal Processing
Currently, our coking coal will undergo the screening process before selling to our customers until a
comprehensive coal processing facility is in place.
Two sets of screening equipment are used to process the Khushuut ROM coal before it is shipped to our
customers. The throughputs of this equipment range from 150 to 200 tonnes of ROM coal per hour. The
screening process removes parting (non-coal) materials which are greater than 50 mm in size. Plans are
to eventually increase the level of coal processing with a washing plant at the Khushuut mine site. When
this happens all non-coal materials mined with the coal will be removed and transportation costs will be
substantially lowered. Until then, the mine will continue using the existing screening process to remove
as much of the non-coal materials and minimize the transportation costs.
As disclosed under the paragraph of Results Analysis, one of the major factors contributed to the
significant impairment loss during the Financial Year was due to a change made to the Group’s mine
infrastructure plan. This related to the continued delay of obtaining a water permit resulting in delay in
construction of a coal processing plant at the Khushuut mine site. To address this and in order to
improve our coal processing power and quality of our coal, we have planned to build a coal washing
plant in Xinjiang before a permanent washing plant is set up in the Khushuut mine site. The proposed
washing plant will have an initial annual coal washing capacity of 1,500,000 tonnes. We are working
with Shandong Energy Xinwen Mining Group Co., Ltd. (“Xinwen Mining Group”) to assist us in this
project. Xinwen Mining Group will provide one-stop assistance in this project from initial planning up to
construction completion. Thereafter, Xinwen Mining Group will provide management services for the
operation of the washing plant.
A suitable place for building the washing plant in Xinjiang has been identified. We are liaising with the
Xinjiang local government for the permit of the land use right and a preliminary proposal has been
submitted to the local government for consideration. As the set up of the Xinjiang washing plant may
take time, to address our coal processing power in immediate term, we have just signed up with a PRC
coal trading company having a washing plant in Xinjiang so that we can commence our washing process
as soon as possible.
Apart from the above, we will continue to prove a suitable place with sufficient water source to the
Mongolian government to set up our coal washing plant and preparation plant in the proximity to our
mine site.
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MONGOLIA ENERGY CORPORATION LIMITED 7
Transportation and Logistics
Xinjiang is our primary market for our coking coal products. As the Khushuut Road has been completed
and commissioned, road transportation through trucks is the model of shipping our coal products out
from our Khushuut Coal Mine to customers in Xinjiang.
The logistic flow of shipping coal out from our mine site is shown below:
Customers
Customs Supervision Warehouse(unloading of coal)
China Border Station — Takeshenken
Mongolia Border Station — Yarant
MEC Dedicated Lane
Customs Bonded Yard (Loading supervised by Mongolian
Customs Offi cials and SPIA offi cers)
Khushuut Coal Mine Site
Leighton — Mining and Loading of coal
311 km Khushuut Road(certifi ed as Customs Bonded Road)
We have engaged five transportation contractors to provide coal hauling services to us. These
contractors together provide a trucking fleet of approximately 180 trucks for our coal hauling services.
Based on our available information, the average loading per truck is around 60 tonnes of coal.
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ANNUAL REPORT 20128
Management Discussion and Analysis
However, not all of these trucking companies provide exclusive services to us and the number of trucks
available will fluctuate due to a variety of factors such as mechanical break down, repair and accidents,
and the business of the contractors. In order to increase transportation capacity, improve reliability and
reduce transportation costs for our operation, we entered into agreement in March 2012 to acquire 80
trucks and 129 trailers. We intend to invite our transportation contractors to provide overall
management to our own trucks and to provide one-stop coal hauling services for our operation. We will
continue to monitor the sufficiency of our trucking fleet from time to time to bring it in line with the
expansion of our operation.
The trucking fleet ships our coal products to the Xinjiang Takeshenken border and unloads at the nearby
Customs Supervision Warehouse. The customers pick up our coal at this location via their own trucks for
further washing and use.
We have built a dedicated lane connecting the Mongolian Yarant border and the Xinjiang Takeshenken
border which is for our exclusive use. This will ensure we have a smooth and speedy customs clearance
which will otherwise be delayed by other border users. The borders work eight hours per day and five
days per week. We will continue our effort to coordinate the government officials of both sides to
expand the operational hours of the borders.
Customers and Sales
We have a long term coal supply contract with Bayi Steel. We did not actively look for customers
because we were only in the trial production stage in the past year. With the commissioning of the
Khushuut Road, we formally commenced commercial production and delivery of our products. We will
take an active role to expand our customer base to coincide with our gradual ramp-up of coal
production.
During the Financial Year, we shipped approximately 17,350 tonnes of coking coal to our customer.
The selling price of our coal during this initial period was expected to be unstable. This was partly due to
our screening facility and coal selection process were at an early development stage which caused
substantial amount of non-coal partings and ash mixed among the coal products, and this lowered the
selling price through adjustment after the washing process. Further, we are selling processed raw coal
products until a comprehensive coal processing facility is in place, and the actual pricing is negotiated
with our customers based on various factors including recovery rate from the screened coal to clean
coal, ash content, washing and transportation costs, etc. Therefore, it is one of our prime objectives to
improve our coal processing capabilities and set up our washing plant as soon as possible to improve
the quality and value of our coal products. We will also improve our on-site laboratory set up to better
control the quality of our coal before shipping to our customers.
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MONGOLIA ENERGY CORPORATION LIMITED 9
Support from the Local Governments for Our Project
On 27 October 2011, we entered into a co-operation agreement with Darvi Soum. The purpose of this
agreement is to enhance co-operation between us and the local government and to provide successful
implementation of our projects and investments planned by MoEnCo. In return, we are required to
support their vocational training and education of unemployed people, to establish a fund for local
support, to provide coal needs and job opportunities for the local people.
Also on 12 December 2011, we entered into a similar co-operation agreement with Tsetseg Soum.
Village Relocation Project and Community Issues
Village Relocation
As discussed in the interim report, there are certain villagers and herders living in the vicinity of our
Khushuut mine site and this causes health and safety concerns regarding our operation. We have an
agreement with the local government to help relocate these villagers to other locations away from our
operational zone.
We submitted the resettlement action plan for the proposed Khushuut village relocation to Khovd aimag
in December 2011. During the aimag civil representative meeting held in December 2011, a decision
was made to relocate Khushuut village center to the territory of Tsetseg soum and 800 hectares of land
was allocated for that purpose.
At the same time, we have requested Khovd aimag to set up a relocation action plan implementation
working committee in order to solve compensation issues of the affected people such as relocation-
related compensation, winter and spring animal shelters compensation in a comprehensive manner.
Community Issues
As part of our corporate responsibility, we take an active part in the local community development as
part of our business involvement. During the Financial Year, we continued to supply free coal (coal not
suitable for export purpose) from our mine to the local community to help the people overcome the long
cold winter. We made donations to kindergartens in Khushuut village, Darvi and Tsetseg soums;
supported the teachers financially to attend training programs and to visit schools; invested up to 150
million Mongolian Tugrik (approximately HK$0.9 million) for remodeling a culture center in Tsetseg
soum.
We will continue to make reasonable donations and provide support to the sectors of education, health
and agriculture for the purpose of supporting local citizens’ lives and jobs.
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ANNUAL REPORT 201210
Management Discussion and Analysis
Exploration Activities
Licences
We had one exploration licence expired and two mining licences suspended during the Financial Year.
The Company now has ten mining licences and ten exploration licences in western and northern
Mongolia, including Khushuut, Gants Mod, Olon Bulag, Govi-Altai, Bayan-Ulgii and Khuvsgul that cover
an area of approximately 335,000 hectares.
Licence 5309X
Exploration on this licence failed to find any mineralization that would justify turning all or a portion of
the exploration licence into a mining licence. Consequently, this exploration licence was allowed to
expire on 16 January 2012.
As this was not a licence under the Khushuut Coking Coal Project and no substantial value had been
assigned to this licence, the expiration of this licence does not have any material impact on our asset
value and operation.
Licences 11889A and 11890A
According to our analysis, these licence areas contain coal which is high in ash and is not of coking coal
quality, thus, it is not an economically viable product for export.
These licences are not part of the Khushuut Coking Coal Project. Taking into account the quality of the
coal found, location and potential market, these licences do not possess potential synergistic effect on
our present coking coal operation. Since no substantial value has been assigned to them, there is no
material impact on our asset value and operation.
Exploration
Exploration work conducted on the exploration licences during the Financial Year consisted of geological
reconnaissance and surface mapping work and core drilling and core sample analysis.
Reconnaissance and mapping work was carried out on exploration licences 5309X, 7460X, 8976X,
11515X, 11628X, 11724X and 12315X. From this work several coal and metals “targets” were identified.
These “targets” will be investigated further during the 2012 field season.
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MONGOLIA ENERGY CORPORATION LIMITED 11
Three separate drilling programs were conducted during the 2011 field season. Two were on exploration
licence 11719X and one was on exploration licence 12126X. One of the 11719X drilling programs
targeted a coal prospect and the other targeted copper/gold prospect. The 12126X drilling program
targeted a coal prospect. The results of all three drilling programs were disappointing that the holes
drilled did not find the coal and/or the copper/gold mineralization as anticipated.
Planned Exploration Programs in 2012
Plans are to do some trenching and analytical work on the targets that were identified during the
previous year’s field reconnaissance and mapping work. Also plans are to drill 19 holes on exploration
licence 7460X and the adjacent mining licence 2913A. The major drilling program is targeting coal
resources.
Legal and Political Aspects
Mining Prohibition Law
On 16 July 2009, the Parliament of Mongolia enacted the MPL which prohibits minerals exploration and
mining in areas such as headwaters of rivers and lakes, forest areas and areas adjacent to rivers and
lakes. Under the MPL, new exploration licences and mining licences overlapping the defined prohibited
areas will not be granted, while previously granted licences that overlap the defined prohibited areas
will be terminated within five months following the adoption of the law. The MPL further states that
affected licence holders shall be compensated. Pursuant to the MPL, the Mongolian government was
supposed to define the boundaries of the relevant prohibited areas by 16 October 2009 but it had not
done so by the prescribed time.
The government of Mongolia adopted Resolution No. 299 (the “Resolution 299”) on 17 November
2010 which sets out the procedures to be used in granting compensation to holders of mineral licences
affected by the MPL. The purpose of Resolution 299 is to remove any overlapping with prohibited areas
and make any necessary changes to the coordinates of the licence area or revoke the licence if deemed
necessary, and grant compensation to the licence holder.
Under Article 17.4 of the Minerals Law of Mongolia adopted on 8 July 2006 (the “Minerals Law”), the
size of area granted by an exploration licence must not be less than 25 hectares but must not exceed
400,000 hectares. Under Article 24.4.1 of the Minerals Law, mining area shall have the shape of a
polygon with borders that are straight lines, not less than 500 metres in length, oriented north-south
and east-west. In this connection, if a mineral licence is compliant with the respective provisions of the
Minerals Law following determination and removal of any overlapping areas with prohibited areas under
the MPL and the making of relevant revisions to the coordinates to such mineral licence, then such
mineral licence will remain valid less the overlapping area.
Article 3.1 of Resolution 299 provides that compensation shall be granted for the area which overlaps
with the prohibited areas under the MPL.
On 8 June 2011, the Government of Mongolia adopted Resolution No. 174, which provides a list of
“partially established boundaries” within which alluvial gold mining operations are prohibited under the
MPL. Our Mongolian legal advisers confirmed that none of our licences are within the list and our
licences are clear under the MPL. They do not aware of any other list that has been adopted by the
government of Mongolia.
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ANNUAL REPORT 201212
Management Discussion and Analysis
The MPL may potentially revoke those licence areas which are currently set out as water basins, water
basin protection zone and forested areas. Our Mongolian legal advisers advised us that some of our
licences have been overlapping with the forest and head water areas, please refer to our licence list in
this Report. Although none of our licences is within the official list under the MPL, the Mongolian
government may issue definitive coordinates for such water basins and forested areas, and should the
Mongolian government do so, further evaluation will be necessary.
Foreign Investment Regulation Law
According to our legal advisers, the Mongolian government has passed the Regulation of Foreign
Investment in Business Entities of Strategic Importance (“Foreign Investment Regulation Law”).
The purpose of this law is to regulate relations concerning investment to business entities operating in
sectors of strategic importance by foreign investors.
The Foreign Investment Regulation Law identifies three sectors as being of strategic importance to the
economy, human development and national security of Mongolia (Foreign Investment Regulation Law,
Article 5.1). These sectors include minerals; bank and finances; and media and communication.
In simple terms, any transactions by a foreign investor to acquire one-third or more of the shares of a
business entity (“Strategic Person”) operating in a strategic sector, or any agreement to control the
management or operation of a Strategic Person, the prior approval of the Mongolian government is
needed (Foreign Investment Regulation Law, Article 6.1).
In the event the foreign investor’s equity interest exceeds 49% of the share capital of a Strategic Person
and such investment exceeds 100 billion Mongolian Tugrik (approximately US$75 million), the
Parliament of Mongolia will decide whether to grant permission.
The Foreign Investment Regulation Law also applies to offshore transactions that ultimately relate to a
Strategic Person. It is not clear as to how this requirement will be implemented in the case of publicly
traded companies or companies with complex upstream structures.
Our legal advisers are of the view that the Foreign Investment Regulation Law will not be applied
retrospectively. However, our mining and exploration activities are in the minerals sector and any future
transactions may be affected by the Foreign Regulation Law.
Political Development
As discussed in the interim report, the parliamentary election of Mongolia would take place in the middle
of 2012.
The Parliament of Mongolia is the highest organ of State Power and the legislative power is vested solely
in the Parliament. As a supreme government organ, the Parliament is empowered to enact and amend
laws, ratify international agreements, and declare a state emergency.
The Mongolian Parliament used to adopt a policy to welcome international investors to invest and
develop its mining sector, and have favourable policies on mining developers. However, there were
certain changes and restrictions recently to control or limit investment in this sector, as seen from the
MPL and the Foreign Investment Regulation Law. We hope the future investment climate is clearer after
the election.
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MONGOLIA ENERGY CORPORATION LIMITED 13
RESULTS ANALYSIS
Revenue
The Group commenced commercial production near the close of this Financial Year thus a low level of
sales activities was recorded. The revenue of HK$6.2 million (2011: Nil) represented by a sales volume
of approximately 17,350 tonnes of coal shipped to our customers at an average selling price of HK$357
per tonne.
Impairment Loss Recognised on Khushuut Mine Related Assets (“Mine Assets”)
A non-cash impairment charge of HK$4.6 billion was made in this Financial Year in respect of Mine
Assets. This impairment did not impact cash flow during the year. The impairment related to (i) mining
structures, mining properties and construction in progress grouped under property, plant and
equipment; (ii) exclusive right of use of paved road under intangible assets; and (iii) development in
progress.
The impairment charge was based on an impairment analysis performed by an independent qualified
valuer (the “Independent Valuer”). The Independent Valuer adopted a value in use model, that is, a
discounted cash flow analysis to assess the recoverable amount of the Mine Assets. The recoverable
amount is equivalent to the present values of a series of future cash flows expected to be generating
over the mine life of the Khushuut mine operation given at a specified discounted rate. The
determination of future cash flows is dependent on a number of factors, including but not limited to,
future coal prices, the amount of measured and indicated coal resources in Khushuut mine, the cost of
bringing the project into production, production schedule, scale of production, production costs, capital
expenditures and etc. The value in use model will also take into account factors such as legal and
environmental regulations in Mongolia. The independent appraisal on the Mine Assets concluded that
the recoverable amount of the Mine Assets was significantly lower than its carrying value. The major
factor contributed to the significant impairment charge was due to a change made to the Group’s mine
infrastructure plan. The continued delays of obtaining water permit for the coal processing plant caused
a serious delay in construction of a coal processing plant at the Khushuut mine site. The Company has
planned some interim measures to partially counteract the negative impact caused by such delay. In
particular, a coal washing plant will be built in Xinjiang, the Group’s target market, but with a smaller
washing capacity than the original plan in Khushuut. This change has a significant impact on the cash
inflow to be generated from the Khushuut mine operation. Thus, in comparing Mine Asset’s recoverable
amount to its carrying value, a HK$4.6 billion impairment loss was measured and was allocated to
various relevant balance sheet items.
The Company believes that the estimates/assumptions applied in the assessment of recoverable
amount by the Independent Valuer are reasonable. However, such estimates/assumptions are subject
to significant uncertainties and judgments. The Company has made its best estimate of all relevant
factors to be included in the value in use model based on current conditions. However, it is possible that
the underlying estimates/assumptions can be changed significantly and further impairment charges/
reversal of charges may be required in future periods.
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ANNUAL REPORT 201214
Management Discussion and Analysis
Staff Costs
Total staff costs (excluding non-cash equity-settled share-based payments) was HK$63.1 million (2011:
HK$73.6 million). The dropped was resulting from the streamlining of management functions in Hong
Kong head office.
Other Gains and Losses
Fair value gain on derivative component amounting HK$432.0 million (2011: HK$71.8 million) was
recorded. It was mainly arising from the new HK$2 billion convertible note issued during the year. The
convertible note contains two components, a liability component and a derivative component. The
derivative component was initially recorded at fair value at its issue date and re-measured at the end of
the year. The resulting change in fair values was then recognized through the consolidated income
statement.
Other Expenses
Other expenses increased sharply to HK$205.1 million (2011: HK$107.2 million). The following main
items accounted for the increase:
(a) Exploration costs of HK$18.0 million incurred during the year not qualified for capitalization as
exploration and evaluation assets (2011: Nil);
(b) Write-down of inventories to net realizable value of HK$75.0 million (2011: Nil). There are two key
factors contributing to the write-down of inventories (i) the Khushuut mine operation was still at its
infancy stage of production therefore the scale of production did not ramp up to its optimum level;
and (ii) unprocessed coal was sold during the year to our customers at a lower price as a matter of
fact that our customers would have to wash and process the coking coal themselves. These
combined factors accounted for the requirement to write-down the carrying amount of the coal
inventory to its net realizable value; and
(c) Cost of sales of HK$20.5 million (2011: Nil). The average cost of sales per tonne was HK$1,182.
Finance Costs
Finance costs increased to HK$247.1 million (2011: HK$149.5 million). The reason for such increase was
due to the reduction in interest capitalized to development in progress. Development in progress refers
to construction in progress relating to an exclusive right of use of paved road. The construction of the
road from the Khushuut mine to Yarant border was completed during the year.
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MONGOLIA ENERGY CORPORATION LIMITED 15
FINANCIAL REVIEW
1. Liquidity and Financial Resources
During the year, the Group’s capital expenditure and working capital were mainly funded by three
sources: (1) short term loans granted by Mr. Lo, chairman of the Company; (2) a net placing
proceeds of HK$117.5 million from placement of 150,000,000 shares at a subscription price of
HK$0.8 per share; and (3) a refund of HK$200 million from an associated company in respect of
an aborted investment project.
A zero coupon convertible note in the principal amount of HK$2 billion issued to Chow Tai Fook
Nominee Limited was matured during the year. On 15 June 2011, the Company issued a 3-year 3%
coupon convertible note in the principal amount of HK$2 billion (the “New CTF Note”) to fully
redeem the zero coupon convertible note. The New CTF Note has a maturity period of three years
from the issue date and can be converted into 1 ordinary share of the Company at HK$0.02 each
for every HK$2 convertible note at the holder’s option at any time between the issue date and
maturity date.
The borrowings of the Group as at 31 March 2012 comprised convertible notes and advances from
a Director amounting to HK$2,998.2 million (2011: HK$2,740.6 million). The effective interest
rates of these borrowings were in the range from 5% to 16.21%. Of the total borrowings, 16.4 per
cent was repayable within 12 months and the rest was falling in the 1 to 3 years range.
At year end date, the cash and bank balances were HK$85.0 million (2011: HK$10.2 million).
The liquidity ratio as at 31 March 2012 was 0.26 (2011: 0.05).
As at 31 March 2012, the Group’s current liabilities exceeded its current assets by approximately
HK$509.8 million. The management of the Group is confident that the Group will be capable to
meet in full its financial obligations as they fall due in foreseeable future. Mr. Lo, the major
shareholder and chairman of the Company, has provided sufficient facilities to meet the Group’s
short term funding needs. Besides, the commencement of Khushuut mine operation can bring in
new revenue to the Group.
2. Investment in Listed Securities
As at 31 March 2012, the Group’s held-for-trading investments comprised of equity securities
listed in Hong Kong with a fair value of HK$27.1 million (2011: HK$37.6 million).
3. Charge on Group’s Assets
There was no charge on the Group’s assets as at 31 March 2012 (2011: Nil).
4. Gearing Ratio
As at 31 March 2012, the gearing ratio of the Group was 0.26 (2011: 0.17) which was calculated
based on the Group’s total borrowings to total assets. The increase was due to the shrinkage of
total assets during the year because of the impairment loss recognized on Khushuut mine related
assets.
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ANNUAL REPORT 201216
Management Discussion and Analysis
5. Foreign Exchange
The Group mainly operates in Hong Kong, Mongolia and Mainland China. The Group’s assets and
liabilities are mainly denominated in Hong Kong dollar, United States dollar, Renminbi and
Mongolian Tugrik. The Group does not have a foreign currency hedging policy. However, the
management will monitor foreign exchange exposure and will consider hedging significant
currency exposure should the need arise.
6. Contingent Liabilities
As at 31 March 2012, the Group did not have significant contingent liabilities (2011: Nil).
RISK FACTORS FACING US
The Group’s business may from time to time face with certain risk factors; some of them may not be
anticipated by or known to the Group. Possible risk factors which may be facing by the Group include,
among others, the following:
Cyclical nature of coal markets, ferrous and non-ferrous metals markets and fluctuations in coal, ferrous and non-ferrous metals prices
The revenue of our operation depends on successful commercial production of coal, ferrous and non-
ferrous resources products in our concession areas.
Therefore, our future business and results of operations are dependent on the supply and demand of
coal, ferrous and non-ferrous resources globally, in particular, the PRC.
The fluctuation in supply and demand of these resources can be caused by numerous factors beyond
the Group’s control, which include but not limited to:
(i) global and domestic economic and political conditions and competition from other energy sources;
and
(ii) the rate of growth and expansion in industries with high demand for coal, ferrous and non-ferrous
resources, such as steel and power industries.
There is no assurance that the PRC, which we assume as our major market, demand for coal, coal
related products, ferrous and non-ferrous resources products will continue to grow, or that the demand
for these products will not experience excess supply.
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MONGOLIA ENERGY CORPORATION LIMITED 17
Development of a mining project may take time and factors affecting its development
In a nutshell, development of a mining project will take time, often through years, and this includes
going through the process of reconnaissance, exploration, deposit analysis and mine planning. There is
no guarantee that a planned development may overcome all hardships encountered during these
processes.
Ultimate commercial viability of a project will depend on whether the deposit is of the desired attributes,
proximity to potential markets, availability of infrastructure and transportation networks, labour costs
and availability, competition of other energy resources and global economic conditions. Governments’
regulations and policies such as taxes and royalties may also have a direct or indirect impact on
encouraging or discouraging investment in the mining sector. Not all planned projects may achieve the
intended economic benefits or demonstrate commercial feasibility.
In the course of development of a project, the Group may change its planning from time to time due to
some unforeseeable circumstances. When this happens, the outcome, prospect or financial position
may be significantly affected.
Significant and continuous capital investment
The mining business requires significant and continuous capital investment. Planned mine exploration
and coal production projects may not be completed as planned, may exceed the original budgets and
may not achieve the intended economic results or commercial viability.
Actual capital expenditures for the projects may also differ from planned in the course of development.
Such factors include locality and geology of the mine sites, method of excavation, availability of
transportation networks, the ancillary infrastructure requirements and distance to the markets, etc.
Policies and regulations
Mining business is subject to extensive governmental regulations, policies and controls. There can be no
assurance that the relevant government will not change such laws and regulations or impose additional
or more stringent laws or regulations. Failure to comply with the relevant laws and regulations in any
mine development and coal production projects may adversely affect the Group. Some of the relevant
laws and regulations in Mongolia are as follow:
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ANNUAL REPORT 201218
Management Discussion and Analysis
Minerals Law
Under the Minerals Law, the State can claim up to 50% interest in entities holding so-called “deposits of
strategic importance”. The Minerals Law also states that a mineral deposit is of strategic importance if a
deposit may have a potential impact on natural security, economic and/or social development of the
country at regional and national levels, or that is capable of producing greater than 5% of the gross
national product of any given year. So far this does not affect our Khushuut Coal Mine but there is no
assurance that this will not happen in the future.
In addition, under the Minerals Law, mineral exploration licences are granted for an initial period of
three years. Holders may apply for an extension of the licences for two successive additional periods of
three years. Renewal of licences must be made timely and subject to payment of annual licence fee.
The Minerals Law also states the licence holders are obligated to meet a minimum exploration
expenditure requirement. Failure to meet these requirements may subject to licence cancellation by the
Mongolian authorities.
The Mongolian authorities may also impose moratorium on any licences if the holders are in breach of
any relevant laws in Mongolia.
Mining Prohibition Law
On 16 July 2009, the Parliament of Mongolia enacted the Mining Prohibition Law (the “MPL”) which
prohibits minerals exploration and mining in areas such as headwaters of rivers and lakes, forest areas
and areas adjacent to rivers and lakes.
Under the MPL, new exploration licences and mining licences overlapping the defined prohibited areas
will not be granted, while previously granted licences that overlap the defined prohibited areas will be
terminated within five months following the adoption of the law. The MPL further states that affected
licence holders shall be compensated.
Pursuant to the MPL, the Mongolian government was supposed to define the boundaries of the relevant
prohibited areas by 16 October 2009 but it had not done so by the prescribed time.
Since the passing of the MPL on 16 July 2009, our mining and exploration activities have been
conducted as usual and not affected by the MPL. Based on the best knowledge of the management,
none of our existing licences have been revoked under the MPL.
The government of Mongolia adopted Resolution No. 299 (the “Resolution 299”) on 17 November
2010 which sets out the procedures to be used in granting compensation to holders of mineral licences
affected by the MPL. The purpose of the Resolution 299 is to remove any overlapping with prohibited
areas and make any necessary changes to the coordinates of the licence area or revoke the licence if
deemed necessary, and grant compensation to the licence holder.
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MONGOLIA ENERGY CORPORATION LIMITED 19
Under Article 17.4 of the Minerals Law of Mongolia, the size of area granted by an exploration licence
must not be less than 25 hectares but must not exceed 400,000 hectares. Under Article 24.4.1 of the
Minerals Law, mining area shall have the shape of a polygon with borders that are straight lines, not less
than 500 metres in length, oriented north-south and east-west. In this connection, if a mineral licence is
compliant with the respective provisions of the Minerals Law following determination and removal of
any overlapping areas with prohibited areas under the MPL and the making of relevant revisions to the
coordinates to such mineral licence, then such mineral licence will remain valid less the overlapping
area.
Article 3.1 of Resolution 299 provides that compensation shall be granted for the area which overlaps
the prohibited areas under the MPL. Our Mongolian legal advisers advised us that some of our licences
have been in overlapping with the forest and head water areas, please refer to our licence list in this
Report.
Our Mongolian legal advisers confirmed that none of our licences are within the list and they are not
aware of any other list that has been adopted by the government of Mongolia. However, there remains
potential for other areas within Mongolia to be later designated as prohibited areas by the government
of Mongolia in accordance with the MPL.
Foreign Investment Law
According to our legal advisers, the Mongolian government has passed the Regulation of Foreign
Investment in Business Entities of Strategic Importance (“Foreign Investment Law”). The purpose of
this law is to regulate relations concerning investment to business entities operating in sectors of
strategic importance by foreign investors.
Any transactions by a foreign investor to acquire one-third or more of the shares of a business entity
(“Strategic Person”) operating in a strategic sector, or any agreement to control the management or
operation of a Strategic Person, the prior approval of the Mongolian government (Foreign Investment
Regulation Law, Article 6.1).
In the event the foreign investor’s equity interest exceeds 49% of the share capital of a Strategic Person
and such investment exceeds 100 billion Mongolian Tugrik (approximately US$75 million), the
Parliament of Mongolia will decide whether to grant permission.
The Foreign Investment Law also applies to offshore transactions that ultimately relate to a Strategic
Person. It is not clear how this requirement will be implemented in the case of publicly traded companies
or companies with complex upstream structures.
The extent and how the law will operate in the future transactions are waited to be seen. However, it
will restrict foreign investment in the minerals sector of Mongolia to a certain extent.
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ANNUAL REPORT 201220
Management Discussion and Analysis
Country risk
The business of the Group is currently in Mongolia with the target market in the PRC. There can be a risk
relating to the likelihood that changes in the business environment will occur which reduces the
profitability of doing business in Mongolia and/or the PRC. Changes of political and economic conditions
in either Mongolia or the PRC may adversely affect the Group.
There is no assurance that the Group’s assets or business will not be subject to nationalisation,
requisition or confiscation due to change of laws or political conditions.
Environmental protection policies
Mining and exploration business is subject to Mongolian environmental protection law and regulations.
Under Article 66 of the Minerals Law, if a licence holder violates environmental protection legislation,
the entity holding the licence may be fined or its activities suspended until it has complied with
environmental and other regulations. In the worst case scenario, a licence may be revoked for non-
compliance pursuant to Article 56 of the Minerals Law.
If the Group fails to comply with existing or future environmental laws and regulations, the Group may
be required to take remedial measures, which could have a materially adverse effect on our business,
operations, financial condition and results of operations.
Operational risks
Leighton LLC (“Leighton”) is our mine contractor responsible for the mining operations of our Khushuut
Coking Coal Project. If there is any unforeseeable event which renders Leighton unable to continue
providing its mining services to us and no effective solution is implemented, our operation may be
seriously impacted.
Our operation is also dependent on the fuel supply condition in Mongolia.
Political stability
The Parliament of Mongolia is the highest organ of State Power and the legislative power is vested solely
in the Parliament. As a supreme government organ, the Parliament is empowered to enact and amend
laws, ratify international agreements, and declare a state emergency.
Specifically, the Parliament may consider on its initiative any issue pertaining to domestic and foreign
policies of the State, and retains within its exclusive power, including but not limited to:
(i) enact laws, make amendments to them;
(ii) define the State financial, credit, tax and monetary policies;
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MONGOLIA ENERGY CORPORATION LIMITED 21
(iii) lay down guidelines for the country’s economic and social development;
(iv) approve the Government’s program of action, the state budget and the report on its execution;
and
(v) supervise the implementation of laws and other decisions of the Parliament.
The Parliament meets semi-annually. Parliament members elect a chairman and vice chairman who
each serves a 4-year term. Parliament members are elected by district for a 4-year term.
The Mongolian Parliament used to adopt a policy to welcome international investors invest and develop
its mining sector, and have favourable policies on mining developers. However, there are certain
changes and restrictions recently to control or limit investment in this sector. There is no guarantee that
the Parliament will not further tighten its policies or adopt a more stringent or radical control on the
mining sector when a more conservative political party or parties dominate the seats in the Parliament
under the recent election.
OUTLOOK
During the Financial Year, we had succeeded in obtaining the approval for the use of the Khushuut
Road. This marks a new era for us in our development.
Although we have commenced our commercial production, we still have a list of challenges to face in
bringing us to a satisfactory point. As anticipated by us, the scale of commercial coal production was at
a lower level at an initial stage, and we are aiming to increase gradually in the medium run. During the
last three months of the Financial Year, after we had obtained the approval from the Mongolian
government to use the Khushuut Road, we had delivered only a small quantity of coking coal to our
customer. We have certain start up issues of our commercial operation. These include our screening
facility and coal selection process were at an early development stage which caused substantial amount
of non-coal partings and ash mixed among the coal products, as well as the technique in matching the
right kind of coal quality demanded from our customer. Therefore, it is our prime objective to improve in
this process. One of the solutions is to have a washing plant in place to process our raw coking coal. We
are working with Xinwen Mining Group to assist us in the washing plant project in Xinjiang, the PRC. As
this plant may take some time from planning to up and running, it will not be put to service in one or
two years’ time. To address this issue, we have signed up with a PRC coal trading company having a
washing plant in Xinjiang to process our raw coking coal. This company has also agreed to act as our
coal sales agent to assist us in selling our coal products directly after washing in the Xinjiang region.
Therefore, for our Khushuut operation, we will work towards increasing coal quality and stabilising the
sales price by continuing to explore and invest in coal processing technology and to enhance mine
engineering work. We are also in discussion with our contract miner, Leighton, regarding our scheduled
production in the second half of this year. We hope to ramp up our production gradually shortly.
We will also continue to improve our operation efficiency by continuing to work with the Mongolian and
Chinese government authorities to increase the border capacities and operating efficiency of the
trucking pool.
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ANNUAL REPORT 201222
Management Discussion and Analysis
From a marketing perspective, we had only one PRC customer during the Financial Year. As explained,
the first and foremost effort during the first half of the Financial Year was to ensure the completion of
the road works of the Khushuut Road and to get the usage approved, we had not taken an active part in
expanding our customer base. In the coming financial year, we will work towards enlarging our
customer base and market coverage through co-operating with some coal trading companies.
In terms of exploration, we will continue to explore new resources within Mongolia mainly through
working on our existing exploration licences.
We have noted recently the Mongolian government has tightened up its control in the newly passed
Foreign Investment Regulation Law. Our Mongolian legal advisers advised that the law will aim to
control foreign investments on the strategic sector of Mongolia including the minerals sector. We do not
know whether the approval requirement under this law is just a procedural process or the Mongolian
government will apply it stringently. It is a newly pronounced piece of law and yet how it is operated is
waited to be seen. Our Mongolian legal advisers advised us that the Foreign Investment Regulation Law
will not apply retrospectively. Nevertheless, it may impact us on our future expansion in acquiring
prospective resources in Mongolia as we expect more lead time is required to obtain approval from the
Mongolian government for new projects.
Seeing the trend and the growing importance of the Xinjiang market, we are identifying potential
resources and development opportunities in the Xinjiang region apart from our current Khushuut
operation. We have developed a technical China team to help us in marketing our coal products,
identifying our potential strategic partners and considering potential resources opportunities.
We are actively working with various working partners on the growth of our business. Our short to
medium term targets are to increase our coal quality and operating efficiency; to decrease and control
our costs; and to expand the market.
This year is the first stage to build up the ground work for the Khushuut commercial operation and we
have taken the first step to penetrate and market our products into the PRC market. Our unique coking
coal quality has the demand from the Xinjiang market. We believe with a continuous focused effort to
improve our production process, the demand for our products will likely increase significantly. If we stay
on track with all our key initiatives to make our improvement, the Khushuut mine project will soon be a
positive cashflow contributor to the Company.
We will continue to look for other resources investment opportunities and strategic partners in the
industry for any cooperation, and to bring value and opportunities to our Shareholders.
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MONGOLIA ENERGY CORPORATION LIMITED 23
EXPLORATION AND MINING CONCESSIONS OF THE GROUP
The information of the Group’s exploration and mining concession areas in Western Mongolia for coal,
ferrous and non-ferrous resources during the Financial Year is as follows:
Licence
(licence no.)
Location
(resources)
Mine area
(approximate)
(hectare) Licence date
Licence valid
period# Development status
(coal resources)
1414A
1640A
4322A
6525A
11887A
11888A
11889A*
11890A*
11515X
Khushuut,
Khovd,
Western
Mongolia
34,000 Various
(please refer to
circular of
22 March 2007)
9 years for
Exploration
Licences (X)▲
and 70 years
for Mining
Licences (A)▲▲
Approximate 141 million
tonnes of in-place resources
according to JORC standards
are reported. Commenced
commercial production in
2012.
MEC will continue to explore
resources in these areas for
further resources development
potential.
(coal, ferrous
and non-ferrous
resources)
8976X
15289A
11628X
11724X
Gants Mod,
Western
Mongolia
32,000 Various
(please refer to
circular of
25 June 2007)
9 years for
Exploration
Licences (X)
MEC will explore resources in
these areas for further
resources development
potential.
Sub-total
Hectares
66,000
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ANNUAL REPORT 201224
Management Discussion and Analysis
Licence
(licence no.)
Location
(resources)
Mine area
(approximate)
(hectare) Licence date
Licence valid
period# Development status
(coal,
ferrous and
non-ferrous
resources)
2913A Olon Bulag,
Western
Mongolia
38 24 January 2007 70 years
for Mining
Licence (A)
MEC will explore resources in
this area for further resources
development potential.
7460X Olon Bulag,
Western
Mongolia
276 24 January 2007 9 years for
Exploration
Licence (X)
As above.
11719X Govi-Altai,
Western
Mongolia
216,644 23 January 2007 9 years for
Exploration
Licence (X)
As above.
12126X Govi-Altai,
Western
Mongolia
41,386 16 January 2007 9 years for
Exploration
Licence (X)
As above.
12315X Govi-Altai,
Western
Mongolia
3,249 2 January 2007 9 years for
Exploration
Licence (X)
As above.
5309X** Khovd,
Western
Mongolia
1,415 24 January 2007 9 years for
Exploration
Licence (X)
Expired on 16 January 2012.
Sub-total
Hectares
263,008
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MONGOLIA ENERGY CORPORATION LIMITED 25
Licence
(licence no.)
Location
(resources)
Mine area
(approximate)
(hectare) Licence date
Licence valid
period# Development status
(ferrous
resources)
14349X Bayan-Ulgii,
Western
Mongolia
2,986 24 October 2008 9 years for
Exploration
Licence (X)
No immediate plan.
14426X Khuvsgul,
Western
Mongolia
4,513 19 November
2008
9 years for
Exploration
Licence (X)
No immediate plan.
Sub-total
Hectares
7,499
Total
Hectares
336,507
1 hectare = 10,000 square metres.
# the exploration licences are for 3 years with two further extensions of 3 years. The mining licences are for 30 years with two further extensions of 20 years.
▲ (X) stands for exploration licence
▲▲ (A) stands for mining licence
* under suspension
** expired on 16 January 2012
licence has area overlapping with forest areas
licence is within the boundaries of headwaters of rivers and lakes and water basin zone
licence has area overlapping with water basin protection zones
-
Corporate Social Responsibility
ANNUAL REPORT 201226
Mongolia Energy Corporation has always committed itself as a good corporate citizen and is fully
conscious of its corporate social responsibility alongside its developments in Mongolia. We will continue
our efforts in the growth and sustainable development of Mongolia, in particular the Khovd province, of
which we have set up our core operation.
During the Financial Year, MEC had continued to contribute to the continuous education sponsorships to
students to attain higher level of tertiary education as well as supporting younger children’s education
opportunities. With the support of the Khovd local government and the various local soums, MEC
sponsored costumes for the annual celebration activities in the area, bringing the community closer and
a better understanding of our operations.
The workforce in our Khushuut operation has created jobs and training opportunities for the local and
vicinity villagers. These trainings and work stimulation programs equipped the villagers with technical
skills to help in the development of the coal mine and a stable working environment to support their
families. These trainings have enriched the local workforce’s exposure to high technical level of
equipment, procedures and operational techniques for the development of Mongolia’s future.
With the Khushuut Road in service, local villagers in the Khovd province are given the opportunity to use
the asphalted road for their transportation of food, materials and necessities. MEC has also contributed
electrical equipments to Govi-Altai soum hospital, aiming to enhance the local medical facilities for the
Young painters in the “Our Future and Road” competition in Uyench soum, Khovd Province.
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MONGOLIA ENERGY CORPORATION LIMITED 27
villagers. In a vast land, travelling, medical supplies and equipment are very important in sustaining a
harmonious and healthy society. Furthermore, for the 5th consecutive year, MEC has donated thermal
coal to local villagers during winter to relieve the local villagers’ hardship in the frosted winter.
In addition, MEC has made contribution to the International Women’s Association of Mongolia. We have
also sponsored local and international conferences and meetings to promote the awareness of pollution
through reporting and data analysis to the Local and Central Government of Mongolia.
MEC firmly believes that we develop the resources we control, but more importantly, we conduct all our
activities in an environmentally responsible manner. In the Hong Kong Head Office, we have set up
Green Office Guidelines for staff to follow. These guidelines include Reuse, Reduce and Recycle. As a
responsible corporate body, it is important that we are aware of the significance of waste control and
recycling.
In the years to come, MEC will continue our efforts we can, in all relevant aspects, in helping the
development of the local area. We will play a significant lead in bringing a harmonious and prosperous
community alongside the development of MEC’s concessions.
Young contortionists from Tsetseg soum performing in the Khushuut Road Opening Ceremony.
Khushuut Road Opening Ceremony with offi cials and guests.
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Corporate Governance Report
ANNUAL REPORT 201228
CORPORATE GOVERNANCE PRACTICES
The board of Directors (the “Board”) recognises the importance of maintaining a high standard of corporate governance to
protect and enhance the benefits of Shareholders. The Board and the senior management of the Company recognise their
responsibilities to maintain the interest of the Shareholders and to enhance their values. The Board also believes a good
corporate governance practice can facilitate a company in rapid growth under a healthy governance structure and strengthen
the confidence of Shareholders and investors.
During the year ended 31 March 2012, the Company had applied the principles of code provisions of the Code on Corporate
Governance Practices contained in former Appendix 14 (the “Former CG Code”) of the Rules Governing the Listing of
Securities (the “Listing Rules”) on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) and had complied
with the code provisions of the Former CG Code except the deviations as mentioned below:
i. Under the code provision A.4.1, non-executive directors should be appointed for a specific term and subject to re-
election.
None of the existing non-executive Directors is appointed for a specific term. This constitutes a deviation from the code
provision A.4.1 of the Former CG Code. However, they are subject to the retirement by rotation under the bye-laws of
the Company. As such, the Company considers that sufficient measures have been taken to ensure that the Company’s
corporate governance practices are no less exacting than those in the Former CG Code.
ii. The code provision E.1.2 stipulates that the chairman of the board should attend the annual general meeting (“AGM”).
The Chairman did not attend the 2011 AGM due to another business engagement. An executive Director chaired the
2011 AGM and answered questions from the Shareholders. The AGM provides a channel for communication between
the Board and the Shareholders. A member of the audit and remuneration committee of the Company was also
available to answer questions at the 2011 AGM. Other than the AGM, the Shareholders may also communicate with the
Company through the contact information listed on the Company’s website.
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MONGOLIA ENERGY CORPORATION LIMITED 29
CORPORATE GOVERNANCE STRUCTURE
Management
Shareholders
The Board
Reporting and AccountabilityAppointment
Audit Committee
Remuneration Committee
Reporting and AccountabilityDelegation of Power
IndependentAuditor
Reporting
Annual Audit
Delegation of Power
Reporting and Accountability
Appointment
Reporting
Examination and Approval of Programs on Internal Control and Audit
Appointment Supervision and Guidance Appraisal
COMPLIANCE WITH MODEL CODE FOR SECURITIES TRANSACTIONS
The Company has adopted its own Model Code for Securities Transactions by Directors (the “Code”), which is on terms no
less exacting than those set out in the Model Code for Securities Transactions by Directors of Listed Issuers in Appendix 10 of
the Listing Rules (the “Model Code”). The Code is sent to each Director on his/her initial appointment and from time to time
when the same is amended or restated.
The Company has also established written guidelines on no less exacting terms than the Model Code (the “Employees’
Guidelines”) for securities transactions by relevant employees of the Group who are likely to be in possession of unpublished
price-sensitive information of the Company. To date, no incident of non-compliance of the Employees’ Guidelines by the
employees has been noted by the Company.
To enhance corporate governance transparency, the Code has been published on the Company’s website at www.mongolia-
energy.com.
During the period of 60 days immediately preceding the publication date of the annual results or, if shorter, the period from
the end of the relevant financial year up to and including the publication date of the annual results, all Directors and relevant
employees are restricted to deal in the securities and derivatives of the Company until such results have been published.
Company Secretary and Legal and Compliance Department will send reminders prior to the commencement of such period to
all Directors and relevant employees respectively.
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ANNUAL REPORT 201230
Corporate Governance Report
In the period of 30 days immediately preceding and including the publication of the half year results or, if shorter, the period
from the end of the relevant quarterly or half year period up to and including the publication date of the results, all Directors
and relevant employees are restricted to deal in the securities and derivatives of the Company until such results have been
published. Company Secretary and Legal and Compliance Department will send reminders prior to the commencement of
such period to all Directors and relevant employees respectively.
It is stipulated under the Code and/or the Employees’ Guidelines that all dealings of the Company’s securities must be
conducted in accordance with the provisions stated therein. Under the Code, the Directors are required to notify the
Chairman and receive a dated written acknowledgement before dealing in the securities and derivatives of the Company,
and in the case of the Chairman himself, he must notify the designated Director and receive a dated written
acknowledgement before any dealing.
All Directors have confirmed in writing that they have complied with the required standards set out in the Model Code and the
Code throughout the Financial Year.
DIRECTORS AND OFFICERS LIABILITY INSURANCE
Promoting good corporate governance and managing enterprise-wide risk are of a priority to the Company. The Company is
convinced that corporate governance and Directors and Officers Liability Insurance (the “D&O Insurance”) complement
each other. The Company has arranged the appropriate D&O Insurance coverage on the Directors’ and officers’ liabilities in
respect of legal actions against Directors and senior management arising out of corporate activities. The D&O Insurance will
be reviewed and renewed annually.
THE BOARD
(a) Board Composition
The Board currently comprises three Executive Directors, one Non-executive Director and three Independent Non-
executive Directors overseeing the operation of the Company. The biographical details of each Director are set out on
pages 38 to 39. Our Board possesses a balance of skills and experience appropriate for the running of the Company’s
business. They come from different streams of professions with diversified expertise including management, finance,
legal and accounting.
The Board members up to the date of the report are:
Executive Directors
Mr. Lo Lin Shing, Simon (Chairman)
Ms. Yvette Ong (Managing Director)
Mr. Liu Zhuo Wei
Non-executive Director
Mr. To Hin Tsun, Gerald
Independent Non-executive Directors
Mr. Peter Pun OBE, JP
Mr. Tsui Hing Chuen, William JP
Mr. Lau Wai Piu
None of the members of the Board is related to one another.
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MONGOLIA ENERGY CORPORATION LIMITED 31
The Board will consider the following attributes or qualifications in evaluating membership in the Board:
– management and leadership experience;
– skills and diverse background;
– integrity and professionalism; and
– independency.
During the year ended 31 March 2012, the Board at all times met the requirements under Rule 3.10 of the Listing Rules
relating to the appointment of at least three independent non-executive directors with at least one independent non-
executive director possessing appropriate professional qualifications, or accounting or related financial management
expertise.
All Independent Non-executive Directors are financially independent from the Company and any of its subsidiaries. The
Company has received written annual confirmation of independence from each of the Independent Non-executive
Directors pursuant to Rule 3.13 of the Listing Rules. Accordingly, the Company considers all Independent Non-executive
Directors to be independent.
(b) Role and Function
The Board is responsible for formulating strategic business development, reviewing and monitoring the business
performance of the Group, as well as preparing and approving financial statements. The Directors, collectively and
individually, are aware of their responsibilities to Shareholders, for the manner in which the affairs of the Company are
managed and operated. In the appropriate circumstances and as when necessary, the Directors will seek independent
professional advice at the Group’s expense for ensuring that the Board procedures and all applicable rules and
regulations are followed.
The Board gives clear directions as to the powers delegated to the management of the Company for the administration
and management functions of the Group. The Directors have separate and independent access to members of the
senior management to make enquiries or obtain necessary information. The representative of the Board will meet the
management from time to time to discuss operating issues of the Group.
All Non-executive Directors, including Independent Non-executive Directors, are not involved in daily management. The
Non-executive Directors are helping the Board in determining overall policies of the Company and contributing to the
decision making of the Board. They also give independent views on the deliberations of the Board and ensure the
financial probity on the part of the Company is maintained in high standard.
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ANNUAL REPORT 201232
Corporate Governance Report
For the year ended 31 March 2012, the Board had:
i. reviewed the performance of the Group and formulated business strategy of the Group;
ii. reviewed and approved the annual and interim results of the Group;
iii. reviewed the internal controls of the Group;
iv. reviewed and approved the general mandates to issue shares of the Company;
v. reviewed and approved the price-sensitive transactions of the Company;
vi. reviewed and approved the connected transactions of the Company; and
vii. reviewed and approved the auditor’s remuneration and recommended the re-appointment of Deloitte Touche
Tohmatsu as the independent auditor of the Group respectively.
To the best knowledge of the Company, there is no financial, business and family relationship among our Directors. All
of them are free to exercise their independent judgment.
(c) Chairman and Chief Executive Officer
The Chairman and the Chief Executive Officer during the year ended 31 March 2012 were Mr. Lo Lin Shing, Simon and
Mr. James J. Schaeffer, Jr. respectively.
The Chairman’s responsibility is to provide leadership to the Board and formulate the Group’s business strategies. The
Chairman is also responsible for ensuring the Board works effectively, in particular, ensuring all Directors receive
reliable, adequate and complete information in a timely manner.
The Chief Executive Officer was responsible for implementing the strategic business plans in relation to the energy and
related resources business of the Group. Mr. Schaeffer retired from the office of Chief Executive Officer effective on
1 June 2012 and his role has been assumed by Managing Director, Ms. Yvette Ong.
(d) Accountability and Audit
The Directors are responsible for preparing the accounts of each financial period, which give a true and fair view of the
state of affairs of the Group and of the results and cash flow for that period. The Directors shall also ensure that the
financial statements of the Group are prepared in accordance with the statutory requirements and applicable
accounting policies.
In preparing the financial statements, the Directors consider that the financial statements of the Group are prepared on
a going concern basis and appropriate accounting policies have been consistently applied. The Directors have also
made judgments and estimates that are prudent and reasonable in the preparation of the financial statements.
The statement of the independent auditor of the Company about their reporting responsibilities on the financial
statements is set out in the Independent Auditor’s Report on pages 51 to 52.
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MONGOLIA ENERGY CORPORATION LIMITED 33
(e) Internal Control and Risk Management
The Board is responsible for the Group’s system of internal control so as to maintain sound and effective internal
controls to safeguard the Shareholders’ investment and the assets of the Group.
The Board has established an on-going process for identifying, evaluating and managing the significant risks faced by
the Group. This process includes continued updating of the internal control system of the Group in response to the
changing business environment and regulatory requirements.
The Board also conducts review of the internal controls of the Group to ensure that the policies and procedures in place
are adequate. The Board assesses the effectiveness of the Group’s internal control system which covers all material
controls, including financial, operational and compliance controls and risk management functions. During the year, an
independent professional consulting firm was engaged to conduct the internal control review of the Group and reported
directly to the audit committee of the Company (the “Audit Committee”). The outcomes of the review were submitted
to the Audit Committee and no major weakness was identified. The independent professional consulting firm also
provided recommendations based on its findings.
To facilitate and enhance better internal control, the Director of Legal and Compliance will assist in internal control and
review process to ensure the compliance aspects of the Group are met. The Company Secretary will ensure the Board
and the Board Committees are provided with timely information and sufficient resources to enable them to discharge
their duties.
(f) Meetings and Corporate Communication
The Group makes great efforts to enhance the communication with investors. From time to time, the website of the
Company (www.mongolia-energy.com) contains updated information of the Group and press releases are posted on
our website in a timely manner. The Shareholders can also visit the Company’s website for updated information of the
Group.
The Company has complied with the Listing Rules regarding the requirements about voting by poll and keeping
Shareholders informed of the procedures for voting by poll through notices of general meetings in circulars of the
Company to Shareholders from time to time.
During the year, the Company held one general meeting which was the AGM. In the 2011 AGM, the Directors and the
independent auditor of the Company had attended to answer the Shareholders’ enquiries.
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ANNUAL REPORT 201234
Corporate Governance Report
The Board conducts meetings on both regular and ad hoc bases from time to time in relation to the business of the
Company. During the year, the Company held four regular Board meetings to consider the final results, interim results,
financial and operating performance. The attendance of each Director is as follows:
Attendance
(Number of meetings)
Executive Directors
Mr. Lo Lin Shing, Simon (Chairman) 4(4)
Ms. Yvette Ong (Managing Director) 4(4)
Mr. Liu Zhuo Wei 1(4)
Non-executive Director
Mr. To Hin Tsun, Gerald 3(4)
Independent Non-executive Directors
Mr. Peter Pun OBE, JP 4(4)
Mr. Tsui Hing Chuen, William JP 4(4)
Mr. Lau Wai Piu 4(4)
BOARD COMMITTEES
The Board has established the following committees with defined terms of references:
• Audit Committee
• Remuneration Committee
Each board committee makes decisions on matters within its terms of reference and applicable limits of authority. The terms
of reference as well as the structure and membership of each committee will be reviewed from time to time.
The terms of references of the Audit Committee and the remuneration committee of the Company (the “Remuneration
Committee”), respectively, are published on our website.
AUDIT COMMITTEE
The Audit Committee has three members, all of whom are Independent Non-executive Directors. Mr. Lau Wai Piu is appointed
as the chairman of the Audit Committee. He has appropriate professional qualifications, accounting and related financial
management expertise.
(a) Composition of Audit Committee Members
Mr. Lau Wai Piu (Chairman of Audit Committee)
Mr. Peter Pun OBE, JP
Mr. Tsui Hing Chuen, William JP
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MONGOLIA ENERGY CORPORATION LIMITED 35
(b) Role and Function
The Audit Committee is mainly responsible for:
i. reviewing the Group’s financial and accounting policies and financial statements half yearly before submission to,
and providing advices and comments thereon to the Board;
ii. discu
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